You received a PPP loan to cover qualifying payroll and non-payroll expenditures to help weather the COVID-19 pandemic, but most likely, you want to know how to make it forgivable. After all, these are hard times, and a forgivable loan could be a fantastic help to your business’ finances. However, the loan contained conditions your business had to meet to be eligible for partial or full forgiveness. So, what are the PPP loan forgiveness requirements?
How do you make sure you meet forgiveness? How do you fill and submit the forgiveness application?
At first glance, meeting the PPP loan forgiveness requirements and filling out the PPP forgiveness application appear daunting. But we’re here to help.
In this article, you’ll find the PPP loan forgiveness requirements. We’ll also show you, in straightforward steps, how to complete the application and submit it.
Borrowers must exercise due diligence because making false statements to receive forgiveness can result in stiff fines and imprisonment.
PPP Loan Forgiveness Terms
PPP loans made to eligible borrowers qualify for full loan forgiveness. but only if borrowers comply with the following terms during the 8 to 24 week covered period following loan disbursement:
First-draw PPP loan forgiveness terms
- Employee and compensation levels are maintained
- The loan proceeds are spent on payroll costs and other eligible expenses
- At least 60% of the proceeds are spent on payroll costs
Second-draw PPP loan forgiveness terms
- Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan
- The loan proceeds are spent on payroll costs and other eligible expenses
- At least 60% of the proceeds are spent on payroll costs
PPP Loan Forgiveness Requirements
The amount of PPP you used to pay salaries needs to be at least 60% (originally 75%). If you used less than that for paychecks, the eligible amount for forgiveness will be reduced, or maybe none of it will be forgiven at all.
DEADLINE: You must file your forgiveness application before a 10-months term after the end of the covered period of the loan.
A new interim final rule (IFR) provides new guidance concerning forgiveness and loan review processes for PPP loans of $50,000 or less.
Under the IFR, PPP borrowers of $50,000 or less are exempted from any reductions in forgiveness based on:
According to the IFR, when a borrower submits Form 3508S or the lender’s equivalent form, the lender will be required to:
How to Apply for PPP Loan Forgiveness
Follow these step-by-step instructions to apply for forgiveness.
1. Contact your PPP lender and complete the correct form
The 3508EZ and the 3508S are shortened versions of the application for borrowers who meet specific requirements. Your lender can provide further guidance on how to submit the application.
2. Compile your documentation
Provide documentation for all payroll periods that overlapped with the Covered Period or the Alternative Payroll Covered Period:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
- Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941)
- State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state
- Payment receipts, canceled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount
For expenses that were incurred or paid during the covered period and showing that obligations or services existed prior to February 15, 2020:
- Business mortgage interest payments: Copy of lender amortization schedule and receipts verifying payments, or lender account statements
- Business rent or lease payments: Copy of current lease agreement and receipts or canceled checks verifying eligible payments
- Business utility payments: Copies of invoices and receipts, canceled checks or account statements
This list of documents required to be submitted to the Lender is not all-inclusive.
3. Submit the forgiveness form and documentation to your PPP lender
Complete your loan forgiveness application and submit it to your lender with the required supporting documents and follow up with your lender to submit additional documentation as requested. Consult your lender for additional guidance and provide requested documentation in a timely manner.
4. Continue to communicate with your lender throughout the process
If SBA undertakes a loan review of your loan, your lender will notify you of the review and the SBA loan review decision. You have the right to appeal certain SBA loan review decisions.
Your lender is responsible for notifying you of the forgiveness amount paid by SBA and the date on which your first payment will be due, if applicable.
What Do You Need to Calculate PPP Forgiveness?
Use this checklist to gather the information you need to complete the PPP Application (also referred to as SBA Form 3508). We also suggest that you review the application before making calculations to become familiar with its content.
- Bank account statements and/or third-party payroll service reports will help verify payroll costs. You’ll need the number of employees reported on your PPP loan application and at the time of completing the PPP Forgiveness application, EIDL advance amount (if any), and actual costs paid during your 24-week/168-day or 8-week/56-day covered period.
- A 24-week Covered Period cannot exceed 2.5 months’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $20,833 per individual.
- An 8-week Covered Period cannot exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
- Payroll tax filings reported (typically on Form 941), State quarterly business and individual employee wage reporting and unemployment insurance tax filings
- Receipts, canceled checks, or statements reflecting the amount of employer contributions to employee health insurance and retirement plans
- Documentation confirming the average number of FTE (full-time equivalent) employees on each weekly payroll for the period selected when completing the PPP Schedule A worksheet
- Receipts and/or canceled checks verifying mortgage interest payments made on real and personal property before February 15, 2020. Do not include amounts for prepayments.
- Receipts and/or canceled checks verifying business rent or lease payments before February 15, 2020.
- Receipts and/or canceled checks verifying business utility payments before February 15, 2020.
Borrowers should keep documentation on file up to six years after the loan is forgiven or paid in full.
NOTE: If you received a PPP loan of $50,000 or less, you may use the simplified application (SBA Form 3508S).
How to calculate PPP Forgiveness
Now that you know the PPP forgiveness requirements and the documents needed, it’s time to fill the PPP application. Don’t worry; these instructions will help facilitate the whole process.
You need to be comfortable with making calculations. If you aren’t, seek help from your accountant or accounting service.
The fill-in-the-blank sections of the application are self-explanatory. But these tips will help you:
- If you received funds in stages, use the date you first received funding.
- Employees at the time of the PPP Forgiveness application are actual employees, not full-time equivalents.
- Covered periods cannot extend beyond December 31, 2020.
- Your business name should be the same one you used on the PPP loan application and your tax returns.
Before you fill out the four sections under Forgiveness Amount Calculation, complete PPP Schedule A (pages 3 and 4 of the application). Once you do, enter the acquired information on Line 1–11 on Page 1.
For lines 2-4 on Page 1 of the PPP Forgiveness application, you aren’t required to report payments you don’t want to include in the forgiveness amount.
Pages 3 and 4: PPP Schedule A (worksheet)
- On Table 1, Page 4 of the PPP Forgiveness application, list every employee you paid during your covered period or alternative covered period, and enter the last 4 digits of their social security number. Do not include independent contractors, owner-employees, self-employed individuals, or partners. Fill in the amount paid for cash compensation for each employee whose principal residence is in the U.S.and compensation does not exceed a $100,000 gross annual salary to include wages, tips, paid leave, and allowances for dismissal or separation pay.
- Complete the Average FTE column. In this column, you’re determining whether payment has been reduced by more than 25%. Each employee working at least 40 hours per week, on average, counts as one FTE. Each part-time employee should be listed as 0.5, or you can figure the actual percentage by dividing the actual hours worked by 40 (for example, 30 hours/40 = 0.75).
- Enter 0 in the Salary/Hourly Wage Reduction column when each employee meets two requirements: Annual salary/hourly wage on June 30 is the same or more than annual salary/hourly wage on February 15 or the annual salary/hourly wage between February 15 and April 26 is less than it was on February 15. If not, subtract the amount of pay during the covered period from 75% of the pay from the period January 1 to March 31. For strictly hourly workers or salaried workers, multiply the average number of hours worked between January 1 to March 31 by 24 for a 24-week equivalent and multiply by 8 for an 8-week equivalent.
- You can include the FTE for employees you couldn’t hire back as long as their positions weren’t filled by new employees.
- Complete Table 2, Page 4, the same way you did in Table 1, except the employees listed were paid more than $100,000 annually for pay periods in 2019.
- Enter information from Table 1 and Table 2 on PPP Schedule A, Line 1 through 5. On line 6, enter employer expenses for employee health insurance. (Lines 6 and 7 do not include contributions for a self-employed individual, general partners, or owner-employees of an S-corporation, because these payments are already included in their compensation). Line 7 includes employer contributions to employee retirement plans, and line 8, the total employer payroll state and local taxes paid on employee compensation.
- Line 9 includes compensation amounts paid to sole proprietors and single-member LLCs and partnerships. On a list attached to the application, show any other individuals paid as owners and how the compensation was paid out.
- Line 10 is the sum of lines 1, 4, 6,7,8, and 9.
- Complete lines 11 and 12 based on your full-time equivalency reduction calculation and enter your FTE reduction quotient on line 13. You can skip lines 11 and 12 and enter “1” on line 13 if you meet one of the three criteria listed.
Now that you’ve completed the PPP Schedule A worksheet, you have the information to complete lines 1 to 11 on Page 1 of the PPP Forgiveness application to arrive at your forgiveness amount, which is the smaller of lines 8, 9, or 10.
On line 6, make sure you add lines 1-4 and subtract the amount on line 5 from that sum. On line 8, multiply line 6 by line 7.
On this page, you need to certify each entry of information with your initials. Be careful when completing this section as lenders can disapprove your application if the SBA decides that you weren’t eligible for the PPP loan.
After initialing each certification, sign the application and fill in the date, printed name, and title.
PPP borrower principal owners can report information relating to veteran status, gender, and race-ethnicity. The information is not a requirement to apply and has no bearing on the outcome of the loan application decision.
Follow the PPP Forgiveness instructions closely when completing the application, alongside this article, it will help you through the application process. Make sure you review the list of documents you must maintain but aren’t required to submit with the application.
Forgiveness forms and instructions
- SBA Form 3508 Paycheck Protection Program Loan Forgiveness Application (updated 01-19-21)
- SBA Form 3508EZ Paycheck Protection Program Loan Forgiveness Application (updated 01-19-21)
- SBA Form 3508S Paycheck Protection Program Forgiveness Application (updated 01-19-21)
Recipients of Paycheck Protection Program (PPP) loans of $50,000 or less will be able to apply for forgiveness using a simplified application (SBA Form 3508S) that was released by Treasury and the U.S. Small Business Administration (SBA).
PPP Loan Forgiveness Requirements: Submitting the Application
After completing the PPP Forgiveness application, you can submit it electronically through your lender. Likewise, you could physically visit with your lender and leave a hard copy of the completed application and supporting documents and let them submit the data to SBA.
Do not send the application to SBA as they work directly with lenders and do not process applications.
Now, the New Normal is No Match for You
The business world is adjusting to new normals and finding creative ways to keep businesses afloat. That’s why we compile helpful articles like this one about PPP Forgiveness to provide answers to questions you may have.
By now, the application probably doesn’t seem nearly as intimidating; at least, you have instructions to guide you during the process. Now you also know the PPP loan forgiveness requirements.
At Camino Financial, our goal is to help your business do more than survive financial challenges but to thrive. Because frankly, we’re all about enforcing our motto, “No Business Left Behind,” which, to us, means helping you face financial difficulties by finding solutions.
We invite you to subscribe to the Camino Financial Newsletter to receive valuable resources on how to transition to neo standards you’ve never had to confront.